The A,B,C, of an Energy Scandal: A legal investigation marred by discrepancies and a threat of a multi-million $ lawsuit
This article was written by Leila Hatoum, A free pen since 2001
Lebanon will be charged over a million dollars in demurrage fees as new test results of the fuel oil carried by the Asopos ship proved to be compliant with the contract’s specifications. The ship, which arrived in Lebanon on April 29, has been banned from unloading the fuel destined to Lebanon’s power plants for the past 33 days.
“The ministry of Energy informed us that the fuel was on spec (specifications). The rent of such a giant ship is $30,000, so that is $990,000 to date. By tomorrow it will be $1,020,000 and the number will continue to increase until the government opens the financial credits for the fuel shipment. The government will be charged with the bill,” Youssef el Khazen, Sonatrach Petroleum Corporation SPC BVI’s legal advisor in Lebanon, told me over the phone.
Until Tuesday, financially-strained Lebanon was under the threat of losing tens of millions of dollars in litigation and penal clause fees as the country’s fuel oil scandal spiraled to a new level.
SPC BVI has recently threatened to take legal action against the Lebanese government for “breach of contract,” over seized fuel oil shipments, delayed fees and uncertainty over the standing contract between both.
The company, a private entity registered in the British Virgin Islands and wholly owned by Algeria’s energy arm Sonatrach Holding, had “sent an official letter to the Lebanese authorities late May addressing the issue. The letter is clear, if they (Lebanese government) continue to breach the terms of the contract signed with SPC BVI, then the company will resort to legal action to safeguard its rights,” el Khazen, said.
SPC BVI has been at the epicenter of a “massive smear campaign in Lebanon” an Algerian official who spoke with me on the condition of anonymity earlier this month.
The Lebanese government had hinted a week ago that it will not be extending the current contract it holds with SPC BVI, which expires by 31 December of this year.
During a media stakeout following a cabinet session around mid May, the Energy and Water Minister Raymond Ghajar had indirectly given away the government’s intent of not renewing SPC BVI’s contract when he told reporters that the government was looking at launching a new tender by year’s end.
The government has up until this October to officially express its decision whether to renew or not SPC BVI’s contract. As per the contract itself, Lebanon must inform the company three months prior to the contract’s end if it wishes to terminate or renew it.
So, based on today’s announcement, much doubt was cast when it comes to the fuel oil scandal, which exploded over the past 3 months in Lebanon. According to our sources, there was no defective fuel oil or fuel waste as it was widely traded by some politicians and several media outlets. Moreover, SPC BVI, with whom the Lebanese government has a contract with to supply fuel to Lebanon’s power plants, is not legally responsible for the fuel oil shipments but rather the Lebanese government.
Not so long ago, in March 2020, a ship named Baltic MT carrying fuel oil destined to one of Lebanon’s Power Plants faced a problem: It was not allowed to offload its cargo and was kept at sea for nearly 10 days amid widely-publicized claims that it was carrying defective fuel oil, despite the fact that no tests had been done at the time it had docked.
The ship had loaded its cargo from GalTrade tanks at one of Italy’s ports, which sold the fuel oil to a Dubai-based company, ZR DMCC, which in turn had sold the cargo to SPC BVI.
However, there is a catch.
“There is an agreement between the Lebanese government and SPC BVI that no cargo is loaded into the ships from the main ports to their final destination in Lebanon without that cargo being tested at a laboratory that is approved by both the government and SPC BVI. Once the government approves the test results, it becomes the property of the Lebanese government and is loaded into the ship and sent to Lebanon,” el Khazen explained.
After tests in government-endorsed laboratories showed that it was on-spec (up to the contract’s specifications), the cargo left to Lebanon and arrived in March but was kept at bay for 10 days amid a fiasco of traded political accusations that the fuel was defective, and without any proof at the time.
As per the standard mechanism in Lebanon, the General Directorate of Petroleum takes a sample from the ship’s load for examination, and if the fuel was confirmed that it meets the required specifications (specs), then the fuel is unloaded into the government’s storage tanks.
The power plant operators also get their own samples for testing during the discharge process, and those samples are sent to Dubai’s Bureau Veritas for inspection to see if they meet the required specification. Nothing had been raised between 2005 to date, that had caused a disruption to the process or to the unloading of fuel or even using it, even when there were doubts that it was not up to specifications.
Following much delay, the load was tested at one of the 3 Lebanese laboratories endorsed by the General Directorate of Petroleum and the results revealed that the fuel was off-spec in one criterion out of several, and that was a change related to the sediment composition. But the fuel oil was not deemed defective or fuel waste. Those are the same laboratories which some of them had their employees implicated in tampering with fuel byproducts (gasoline and diesel oil) tests over the past two months in a case involving fuel distributors known in the media as the fuel cartel in the country. The investigations had.
Sonatrach’s SPC BVI was quick to move and offer a replacement which was on-spec, at no additional cost to Lebanon, in exchange of the Baltic MT load. It also asked for the test results.
At the time, Lebanon’s Fiscal Judiciary headed by Magistrate Ali Ibrahim examined the case and decided to close the file, as there was no proof of financial misconduct or squandering of any of the country’s public money, since there was no additional fees to the original cost.
“The government had to pay for one cargo, so there was no need to open a letter of credit for the replacement,” explained el Khazen.
Less than a month later, another fuel-oil carrier named ASOPOS faced the same fate in April 2020. The cargo was loaded in Texas, U.S.A., after the Lebanese government approved the test results at the assigned laboratory abroad. The cargo was originally sold to SPC BVI by a Swissbased company called Euronova which, according to our sources, has indirect ties to the Basatni family in Lebanon.
ASOPOS, which arrived in Lebanon in April, also faced similar accusations as Baltic MT. Tests showed that it was off-specs in one criterion as well and that was the density at a negligent rate according to el Khazen who said “the density should be under 0.091 and the test showed it at 0.093.”
Again, SPC BVI asked that the government hand over the test results but nearly a month on, the government is yet to do so.
Both ships held blended fuel as any fuel oil shipped worldwide.
“The contract between the government and SPC BVI which clearly makes the Lebanese government responsible for the cargo the moment it is approved and loaded into the ships,” according to Lebanese Lawyer Saeed Alameh.
“We had sent an empty ship to load what they are calling defective fuel, to help clear storage space for the government, and another ship to unload the on-spec cargo. Both ships have been kept at bay along with the two original ships which the government refuses to release, and the judiciary is not allowing the company to either unload the new shipment or take away the rejected fuel oil,” el Khazen revealed.
This is costing the company around $25,000 to $26,000 per day in demurrage fees, SPC’s legal advisor said, adding that “There is no reason for the continued delay by the government and the bill will be handed to the government later. By that, the Lebanese government has an increasing tab of $100,000 a day over the past month, and counting.
What raises further questions is the fact that the Lebanese authorities continue to delay handing over of the test results done in Lebanon for both ASOPOS and BALTIC MT. The issue has been ongoing for over a month now, according to el Khazen.
A Judicial Investigation Marred by discrepancies
But the cherry on top in terms of mistakes committed in this case, belongs to the judiciary who disregarded a major legal rule.
When pursuing the case, the Lebanese judiciary went after two companies: ZR Energy and Basatni, despite them not being part of the contract between SPC BVI and the government.
“By law, when you have a contract with an entity and it breaches the contract, you sue that entity, and not someone else. For example, if I bought a Dior bag from you and you had bought it from a shop in France, but the bag turned out to be a knockoff, I can only sue you, and not the shop in France. At a later stage of legal investigation, the judiciary can bring the French shop owner into the case as a third party, so long that the lawsuit is raised against you first,” explained Alameh.
Oddly enough, the Lebanese judiciary did not file charges against SPC BVI, and went directly after the third party, and that technicality alone may cost Lebanon the case and subject it to an arbitration with SPC BVI worth millions of dollars, aside possible counter lawsuits by both ZR DMCC and the Basatni’s for damage done to reputation.
And that is already materializing as the Basatni issued a lengthy statement in that context, while ZR DMCC’s statement, which denied any wrongdoing, is not the same company as ZR Energy in Lebanon, whose offices were shut by the judiciary in April, much like what was done to the Basatni offices late May.
So, not only did the judiciary issue arrest warrants against ZR Energy executives, technically and legally a company that had nothing to do with the fuel oil sold to SPC BVI or with the contract held between the Lebanese government and SPC BVI, but also it did not file a case against SPC BVI as a first party in the whole issue.
According to the same judiciary sources, hundreds of dollars in gifts that were given by the aforementioned companies’ executives to public servants in the energy sector, constituting a bribe and not company gifts as claimed.
Accusation of bribery were denied by the persons interrogated with from ZR Energy as per documents we obtained, insisting they were corporate gifts.
The same judiciary sources were quick to clarify that the Lebanese government had already brought in SPC BVI’s representative in Lebanon, a Mr. Tarek Fawwal, into the case, “thus the claim that the Lebanese magistrate went after a third party directly is incorrect.”
El Khazen mocked the info, saying that Fawwal “never has been nor is a representative of SPC BVI. He is neither an employee of SPC BVI nor receives a salary from it. Furthermore, SPC BVI is not part of the ongoing legal pursuit nor was charged in it.”
Hence, SPC BVI was never dragged as a first party in the case in order for the Lebanese judiciary to pursue a third party, which it alleges was the side that sold the fuel oil to SPC BVI and which was sold to the government later.
“Fawwal works for a shipping agency in Lebanon called Victoir. In 2018, SPC BVI’s officials sent an official letter to the Lebanese authorities explaining that Fawwal was merely an employee of Victoir Shipping Agency who clears SPC BVI’s papers for most of its ships entering or leaving Lebanon, and that is merely an office boy’s work. All contractual duties and representation were retained by SPC BVI’s head and that is mentioned in the letter,” said el Khazen.
And such a grave error may collapse the whole case.
Meanwhile, according to sources from Italy, ZR DMCC is in the prospect of legally pursuing GalTrade who sold it the fuel oil that was deemed off-spec due to a change in sediments. GalTrade did not respond to our attempts to contact it, at a time when talks between both companies’ lawyers were ongoing over the matter.
Attempts to reach ZR DMCC executives also failed, but according to a source close to the company, ZR DMCC may be headed to filing a lawsuit against GalTrade over fraud and breach of contract.
So why is it important for the Lebanese government to speak of on-spec or off-spec fuel oil that is allegedly behind the breakdown of some of its power plants, when power ship Karadeniz, rented by the Lebanese government is not impacted by it.
And we arrive to the third scandal in the case, following the threat of arbitration and the judiciary’s technical errors. The story is far from being over and it certainly did not start with the arrival of the MT Baltic and Asopos ships to Lebanon.
Power Plants “Sans Separators”
Baltic MT and Asopos were not the only ships which had questions raised about their load.
Two ships which Lebanon had received back in early 2019 and in July 2019, were allegedly offspec, and one of the power plant operators, MEP refused to use their load fuel oil, which had tested with higher acidity, as the new power pants lack a proper fuel treatment system.
According to our sources in the energy sector, the oil was later used in the older power plants which have boilers to burn the fuel, and by another operator, Karadeniz power ship, because it is superior to the existing power plants due to the fact that it has superior separators, which enable it to treat the imported fuel without being impacted by its specs. The reason is because power ships have to traverse the world and work in different countries and fuel may not be up to standards everywhere.
Both new power plants operate on Fuel type B and the specifications are set in contract by the General Directorate of Petroleum, which according to sources from the energy ministry, “usually orders the cheapest type of fuel.” The older power plants, which have boilers, can bypass this problem and they operate on Fuel oil grade A, but can still burn fuel oil B.
Energy Minister at the time Nada Boustani was the first to tip off the judiciary to investigate the case of the off-spec fuel oil, especially after learning that it was a norm to burn the fuel irrespective over the past years, which constituted a hazard to the engines. The judiciary in Lebanon has recently interrogated Boustani over the case of the 2019 ships, but as the case is ongoing, Boustani told me over the phone that she cannot comment on it.
However, she commented on other technical issues as to why do the new power plants lack the required fuel treatment system and separators that safeguard them from off-spec fuel. The government a contract with a Danish company, BWSC, to build two new power plants few years back (Zouk and Jiyyeh) that should have been up to those specifications.
When the problem was raised, Boustani demanded that the separators be installed and that BWSC carry the contract up to the specified design in the contract, which resulted in litigation.
Long story short, “the separators arrived in Lebanon and have been sitting on the docks at Beirut port awaiting to be installed,” as per Boustani.
To date, the investigation is ongoing, and no one knows when will the separators be installed at the new power plants. What is for sure, Lebanon remains under the threat of being dragged into arbitration over its current contract with SPC BVI, and third party companies may also move with litigation against the government over the technicalities.
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